Pots of gold? Pension Freedoms three years on

In his spring 2015 Budget, then-Chancellor George Osborne’s substantive changes to private pensions represented a sea-change to the way people were able to access their pension:

• Previously, limits on pension drawdown made many defined contribution pension retirees reliant on annuity products that paid a guaranteed income which was usually fixed with no flexibility.
• After pension freedoms, anyone aged 55 and over can access the whole amount of their money purchase pension fund as they see fit.  For most people no tax is payable on the first 25 per cent and the remainder is taxed at the individual’s income tax rate(s) as if it was salary.

But three years on, have the changes really represented pots of gold at the end of retirement rainbows? Read our review of pension freedoms three years on to find out.

Pros

In terms of advantages, on a basic level, pension freedoms do what they say on the tin — providing the flexibility for people to align their retirement income to their circumstances and take ownership of their pensions by accessing them when they want, for whatever reason they choose.

It’s a move that’s proved popular. A July 2018 HMRC report revealed that approximately 1 million savers have accessed £17.5 billion in the three years since introduction. And £2.3 billion of flexible pension payments were made between April and June 2018 compared to £1.7 billion in the first quarter.

Cons

When pension freedoms first hit the headlines, some feared it would encourage retirees to wipe out their savings with wild spending on holidays, helicopters and luxury yachts — like bamboozled early 90s lottery winners.

There’s been little evidence of this, but there are catches to withdrawing as much cash as possible immediately.

For instance, if you dip too deeply into your pension at one fell swoop, you might inadvertently push yourself into a higher income tax bracket and perhaps more importantly, run out of money in retirement.

Our view

You should always seek professional advice before making major decision about your pension, but here are three options:

• Leave your pot untouched — most pensions are in investment funds, so yours might increase as dividend and other income is reinvested and prices of assets grow. Investments do go up and down in value, and it is important to make sure any investments are appropriate for you.
• Take 25 per cent tax free and use the remainder to receive an income through flexi-access drawdown which ensures the rest of your fund remains invested, but you can still take income when required. Further withdrawals are taxed as they are taken — useful for managing your tax levels.
• Take your tax-free 25 per cent, then buy an annuity — despite their previous bad press, it’s important to consider securing an income by buying an annuity. Annuities provide the security of a definite income for the rest of your life, meaning you can manage your finances accordingly. You can also gain a higher annuity rate if you have certain health conditions or are a smoker.

Your circumstances and future plans will inform your decision — but in simple terms, it’s important to calculate if your plans are sustainable in the long-term.

Chancellor advises that a canny rather than carefree approach to pension freedoms unlocks their best benefits. And as ever, we’re happy to help you solve the conundrum.

If you’re seeking straightforward financial management advice, call 01204 526846 to chat